Deal sourcing in Africa is driven largely by deep understanding of local markets, strong local relationships and networks. If used well, it will not only ensure exclusivity during the acquisition process but can guarantee reasonable entry valuation and lay solid foundation for a smooth relationship with the portfolio companies throughout the investment life cycle. Deals that are done through auctions tend to be competitively priced and in the process, create unnecessary distraction for management.

The attraction of PE to Africa is driven largely by many factors such as: the huge market size – Africa is home to over 1 billion people; relatively young population – about 60% are below 40 years of age; favorable demographics – rising middle class, increasing urbanization, increasing disposable income etc; improved democratic rule and governance, increasing public sector reforms, reducing incidences of civil unrests and wars etc and the mobile technology revolution in Africa driving increased efficiencies, productivity and reducing cost of doing business.

Last month saw the launch of the Mkoba Private Equity Fund in Dar es Salaam, Tanzania. The fund, with its target size of $300 million, seeks to support SMEs in various African nations, believing this to be an under-resourced sector that is crucial to the continued growth of African economies.

Private equity is a vital facet of sustainable development – serving as a mechanism to allow businesses to establish themselves, and to expand. Private equity funds enhance that effect through collective investment, in areas related to private equity: venture or growth capital, distressed investments, leverage buyouts, or mezzanine capital.

The private equity industry in Sub-Saharan Africa is climbing to unprecedented levels. The core reason for this is rapid economic growth in many African nations, but also of significance are the facts that there is presently little or no commercial and consumer lending markets in the subcontinent, banks perceiving the risks as too high, and interest rates from lending institutions tend to be cripplingly inflated.

As African nations march towards more formal, regulated economies, private equity is determined to play more than just a walk-on part. But there is still much to learn about doing business in this diverse region.

Many foreign companies, from multinationals to family businesses, are looking towards Africa and its strong growth curve with a mind to investing, and the Private Equity (PE) route, in its infancy everywhere save for South Africa, is proving very attractive

Private equity (PE) as an asset class has received reasonable prominence in Africa in recent times. New records are being set both at the levels of fund raising and sector diversity of investments. Africa is becoming increasingly investor-friendly!

Private equity investment might provide some exciting opportunities for your business, but it also comes with a number of challenges. Private equity is capital that is put into a new or growing business in return for part ownership of the business and a share of its profits. Private equity investors don’t typically want to be permanently involved in a business – they will step in for a few years and then exit by selling back their shares to the business, along with a return investment.

Growth, whether organic or inorganic (expansion by mergers and acquisitions), is often the most important driver of value. The main challenge management face in achieving ambitious targets is to assess the most optimal funding structure suitable for their company. There are several funding options available in our markets, these can be primarily categorized into debt and equity.

Seven of the world’s ten fastest growing economies are in Africa, 52 African cities have populations of over 1 million people and by 2040 it is expected that 1.1 billion Africans will be of working age. Africa has 60% of the world’s uncultivated, arable land; 56.7% of the world’s diamond (gemstone) production, 66% of the worlds’ cocoa production, 10% of the world’s oil reserves, 80-90% of the world’s platinum group metal reserves and 40% of the world’s gold reserves.

Africa’s private equity (PE) landscape is uncharted and at an early stage of development, however, it is growing steadily and giving good returns. In fact, according to a KPMG survey, a record amount of 25.7 billion rand ($3.03 billion) in PE money from Africa was returned to investors in 2011, up from R18.1 billion in 2010.

According to Dapo Okubadejo, the partner in charge of Corporate Finance & Financial Advisory Services at KPMG Nigeria:

“Africa is now viewed by PE houses and fund managers as a priority investment destination. As growth in other economies have slowed in recent years due to the 2008/9 recession and current crisis in the Eurozone, investors have been looking to emerging markets and economies that will provide higher return rates and Africa is continuously proving its business case for investment.”

As previously highlighted, private equity returns continue to outstrip quoted shares and it is certain that operational improvement in portfolio companies is a key component of value creation. Of our sample, 63% had been involved with a private equity-backed business which was subsequently sold and, of these, 77% had been sold for a profit.

According to the survey, the most important contributors to the value uplift were operational improvements and sales growth. Leverage and growth through acquisitions were much less important; highlighting perhaps the reality of the more difficult funding climate.

The survey research suggests the appointment of an effective chairman can make a significant contribution to the business through, among other things, ensuring the relationship between private equity and management remains collaborative.

The research revealed that 78% of respondents felt that the aim of private equity backers and management was well aligned at the start, but for close to one-third of our sample, the relationship worsened over time. Reasons given were usually related to private equity backers being unclear or changing their minds about the strategy for the business.

As you would expect, operating partners need to have relevant senior managerial and sector expertise as well as strong interpersonal skills. Further, if they are really plugged into the private equity firm and have built up a mutual understanding through working together over time, this can make a real difference in the efficiency of how decisions are made.